Master Case: AMD: The income statement: Valuation and Projections: Session V
We’ve done five of the 9 steps. We have gathered data, done an industry analysis, performed pre-analysis, read up on the management’s views of the future, and generated some assumptions. We’re almost finished so don’t stop yet. Just a few more steps, so let’s start
Projection of financial statements is done in two steps:
- Projecting the income statement
- Projecting the balance sheet
Here are the figures for Net Revenue and Cost of Sales for 1998 and 1999.
Income Statement | 1998 | 1999 |
Net Revenues | 2,542,141 | 2,857,604 |
Cost of Sales | 1,718,703 | 1,964,434 |
Gross Profit | 823,438 | 893,170 |
The Net Revenue and Cost of Sales for 1999 were $2,857,604 and $1,964,434, respectively. Our assumptions for 2000 are as follows:
Income Statement Assumptions | 2000 | 2001 | 2002 | 2003 |
Net Revenue | 15% | 12% | 9% | 6% |
Cost of Sales | 70% | 68% | 66% | 64% |
We expect sales to grow by 15%. This means that the 2000 sales figure will be
2000 Sales = 1999 Sales * (1 + 15%) = 2,857,604 * (1.15) = $3,286,245
What would he figure be for 2001? We expect revenue to grow by 12% in 2001 from their level in 2000, which equates to
2001 Sales = 2000 * (1 + 12%) = 3,286,245 * (1.12) = $3,680,594
2002 would be computed the same way
2002 Sales = 2001 * (1 + 9%) = 3,680,594 * (1.09) = $4,011,847
You should know by now how to compute 2003 Sales
2003 Sales = 2002 * (1 + 6%) = 4,011,847 * (1.06) = $4,252,558
Charting these numbers we have projected the sales for the next four years
Income Statement Assumptions | 2000 | 2001 | 2002 | 2003 |
Net Revenue | 3,286,245 | 3,680,594 | 4,011,847 | 4,252,558 |
The next item on our “to do” list is computing the Cost of Sales.
2000 | 2001 | 2002 | 2003 | |
Cost of Sales | 70% | 68% | 66% | 64% |
Revenues or Sales are the only items that can be projected sequentially on a year-to-year basis. Everything else will be projected as a percentage of the expected sales levels. Multiplying Revenues by the Cost of Sales assumptions gives us the following numbers for each of the next four years for Cost of Sales
Income Statement Assumptions | 2000 | 2001 | 2002 | 2003 |
Net Revenue | 3,286,245 | 3,680,594 | 4,011,847 | 4,252,558 |
Cost of Sales- assumptions | 70% | 68% | 66% | 64% |
Cost of Sales- projections | 2,300,372 | 2,502,804 | 2,647,819 | 2,721,637 |
We can now arrive at the figure for Gross Profit. Gross Profit is the difference between Revenues and Cost of Sales
Projected Income Statement | 2000 | 2001 | 2002 | 2003 |
Net Revenues | 3,286,245 | 3,680,594 | 4,011,847 | 4,252,558 |
Cost of Sales- projections | 2,300,372 | 2,502,804 | 2,647,819 | 2,721,637 |
Gross Profit | 985,873 | 1,177,790 | 1,364,028 | 1,530,921 |
Operating Expenses are also calculated using the same method as the cost of sales. Simply multiply sales by the assumed percentage consumed by the specific operating expense to get the projected numbers.
20% of Sales is taken up by the Marketing, General, and Administration expense for 2000
= 3,286,245 * .20 = $657,249
Depreciation and Amortization is the only item that requires special attention. Depreciation, as mentioned earlier, is calculated as a percentage of Fixed Assets and not as a percentage of Sales. Therefore, we have left this head blank.
Projected Income Statement | 2000 | 2001 | 2002 | 2003 |
Operating Expenses | ||||
Marketing, General & Administration – assumptions | 20% | 21% | 22% | 23% |
Marketing, General & Administration – projections | 657,249 | 772,925 | 882,606 | 978,088 |
Research & Development – assumptions | 21% | 20% | 19% | 18% |
Research & Development – projections | 690,111 | 736,118 | 762,251 | 199,019 |
Depreciation & Amortization | ||||
Depreciation & Amortization | 2,859,033 | 3,284,930 | 3,671,642 | 4,011,863 |
Operating Income is Gross Profit less all Operating Expenses. Operating Income is also known as Earnings before Interest & Taxes or EBIT.
Projected Income Statement | 2000 | 2001 | 2002 | 2003 |
Gross Profit | 985,873 | 1,177,790 | 1,364,028 | 1,530,921 |
Total Operating Expenses | 4,206,393 | 4,793,973 | 5,316,499 | 5,188,970 |
Operating Income | -3,220,520 | -3,616,183 | -3,952,471 | -3,658,049 |
Interest expense can be calculated using three different methods.
- If supplied with a business’ long-term debt figures, you can calculate the interest payment by multiplying the interest on the debt with the amount of the debt. If a business has multiple loans, add all the individual interest payments together to get the interest payment.
- The second method is to calculate the cost of debt and assume that it will remain constant, and multiply that by the debt outstanding to get the interest expense. Since you don’t have information about AMD’s long-term debt breakdown, this method to calculate the interest expense is recommended.
- For businesses that have no debt or loans and carry significant cash and short-term securities, which therefore earn interest, there is a simpler approach that links interest income to sales. Just assume that interest earned is a percentage of cash on hand.
It is time to calculate the tax AMD will pay in the next few years and the minority interest. But since we expect AMD to operate at a loss for the next few years the effective tax rate will be zero and AMD will get an income tax benefit. We will assume the effective tax benefit to around 50%.
Minority interest is also assumed to be zero.
Projected Income Statement | 2000 | 2001 | 2002 | 2003 |
Income before taxes | -3,187,658 | -3,579,377 | -3,912,353 | -3,615,524 |
Provision for taxes | 1,593,829 | 1,789,689 | 1,956,176 | 1,807,762 |
Income before minority interest | -1,593,829 | -1,789,688 | -1,956,177 | -1,807,762 |
Minority Interest | X | X | X | X |
Net Income | -1,593,829 | -1,789,688 | -1,956,177 | -1,807,762 |
Putting all these charts together, we get the following figures:
Projected Income Statement | 2000 | 2001 | 2002 | 2003 |
Net Revenues | 3,286,245 | 3,680,594 | 4,011,847 | 4,252,558 |
Cost of Sales | 2,300,372 | 2,502,804 | 2,647,819 | 2,721,637 |
Gross Profit | 985,873 | 1,177,790 | 1,364,028 | 1,530,921 |
Operating Expenses | ||||
Marketing, General & Administration | 657,249 | 772,925 | 882,606 | 978,088 |
Research & Development | 690,111 | 736,118 | 762,251 | 199,019 |
Depreciation & Amortization | 2,859,033 | 3,284,930 | 3,671,642 | 4,011,863 |
Total Operating Expenses | 4,206,393 | 4,793,973 | 5,316,499 | 5,188,970 |
Operating Income | -3,220,520 | -3,616,183 | -3,952,471 | -3,658,049 |
Interest & Other Income | 32862 | 36806 | 40118 | 42525 |
Income before taxes | -3,187,658 | -3,579,377 | -3,912,353 | -3,615,524 |
Provision for taxes | 1,593,829 | 1,789,689 | 1,956,176 | 1,807,762 |
Income before minority interest | -1,593,829 | -1,789,688 | -1,956,177 | -1,807,762 |
Minority Interest | X | X | X | X |
Net Income | -1,593,829 | -1,789,688 | -1,956,177 | -1,807,762 |